The Financial Conduct Authority (FCA) announced on April 3, 2023, its decision to require the ICE Benchmark Administration Limited (IBA) to continue the publication of the one-, three-, and six-month U.S. Dollar (USD) LIBOR settings past June 30, 2023, until Sept. 30, 2024, using an unrepresentative ‘synthetic’ methodology.¹ Pursuant to its order, the FCA will permit one-, three-, and six-month synthetic USD LIBOR settings in all legacy contracts except cleared derivatives. As noted above, synthetic USD LIBOR will consist of an unrepresentative ‘synthetic’ methodology – the IBA must calculate the settings of each variation of synthetic USD LIBOR using the relevant CME Term SOFR Reference Rate, as administrated by CME Group, plus the respective International Swap and Derivatives Association (ISDA) fixed spread adjustment (0.11448%, 0.26161%, and 0.42826% for one-, three-, and six-month tenors, respectively²).

The Adjustable Interest Rate Act (LIBOR Act) establishes benchmark replacements for contracts governed by U.S. law that (a) reference the overnight and one-, three-, six-, and 12-month tenors of USD LIBOR and (b) lack terms that provide for the use of a clearly defined, and practicable benchmark replacement rate following the cessation of USD LIBOR after June 30, 2023.³ The overnight and 12-month USD LIBOR settings will cease permanently after publication on June 30, 2023. The FCA announcement continues to counsel the active transition of contracts away from USD LIBOR, and the announcement further overrode prior exemptions, and states from July 1, 2023, after USD LIBOR ceases, all new use of synthetic USD LIBOR in contracts will be prohibited under the benchmarks regulation.

The impact of this decision may have the following effects:

(1) Legacy LIBOR contracts covered by the LIBOR Act should largely prevail unaffected by synthetic USD LIBOR.

(2) Legacy contracts not under the LIBOR Act, i.e. contracts with express fallback provisions, but without a non-representativeness trigger, may use synthetic USD LIBOR if the underlying contractual language does not preclude the use of synthetic USD LIBOR.

(3) Legacy deals with an underlying credit agreement containing Alternative Reference Rates Committee (ARRC) fallback language to a replacement rate upon LIBOR becoming non-representative cannot use synthetic USD LIBOR. Some contracts that do not contain ARRC fallback language may also include non-representativeness as a trigger. These deals will transition from LIBOR to a replacement rate on or before June 30, 2023.

(4) Deals with underlying contracts containing a trigger to transition from LIBOR when it is no longer representative will convert to a replacement rate, not synthetic USD LIBOR.

Taft continues to provide leadership in this transition and strives to provide legal updates on issues impacting clients. Taft’s LIBOR transition team provides advice and thought leadership on the many challenges associated with the LIBOR transition. Please reach out with any questions or for assistance regarding this transition or any finance law needs.

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¹ “FCA announces decision on synthetic US dollar LIBOR”. 03 Apr. 2023. https://www.fca.org.uk/news/news-stories/fca-announces-decision-synthetic-us-dollar-libor

² https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2023/ARRC-statement-on-1-3-6-12-month-USD-LIBOR.pdf

³ Adjustable Interest Rate (LIBOR) Act, 12 CFR Part 253. 27 Feb. 2023. 2023-00213.pdf (govinfo.gov)